Question

Cullumber Construction enters into a contract with a customer to build a warehouse for $1070000 on March 30, 2021 with a performance bonus of $40000 if the building is completed by July 31, 2021. The bonus is reduced by $8000 each week that completion is delayed. Cullumber commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by	Probability
July 31, 2021	70%
August 7, 2021	20%
August 14, 2021	5%
August 21, 2021	5%

The transaction price for this transaction is

$785400

$1070000

$777400

$1106400

Answer 1

Answer:

Completed By	Transaction amount	Probability	Expected Transaction Amount
July 31, 2021	$       11,10,000.00	70%	$                       7,77,000.00
August 7, 2021	$       11,02,000.00	20%	$                       2,20,400.00
August 14, 2021	$       10,94,000.00	5%	$                          54,700.00
August 21, 2021	$       10,86,000.00	5%	$                          54,300.00
The Transaction Price for Transaction	$                            11,06,400.00

Option 4 is Correct Answer.

Workings:

Workings	Transaction Amount
July 31, 2021	=1070000+40000
August 7, 2021	=1070000+(40000 -8000)
August 14, 2021	=1070000+(40000 -8000-8000)
August 21, 2021	=1070000+(40000 -8000-8000-8000)

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